All in the Family

Crony capitalism is the key development challenge facing Tunisia today

Last week’s Economist magazine focused on Crony Capitalism. From the powerful oil barons in the USA in the 1920s to today’s oligarchs in Russia and Ukraine, they show that such entrenched interests have been a major concern over time and around the globe. North Africa is no exception. The fortunes accumulated by the family and friends of President Zine Al-Abidine Ben Ali of Tunisia and Hosni Mubarak of Egypt were so obscene that they helped trigger the Arab Spring revolutions, with protestors demanding an end to corruption by the elite.

In a new study, we find that the scale of state capture in Tunisia under Ben Ali’s was extraordinary—by the end of 2010 some 220 firms connected to Ben Ali and his extended family were capturing an astounding 21% of all private sector profits annually in Tunisia (or $233 million, corresponding to over 0.5 percent of GDP).

Tunisia’s post-2011 opening gave us a unique opportunity to explore data that was previously inaccessible to the public. In collaboration with Tunisia’s National Statistical Office, we compiled a unique data set: We merged data on the investment regulations with balance sheet and firm-level census data from Tunisia for 1994–2010 in which we identified 220 firms connected to Ben Ali’s extended family (as identified by the Commission charged with confiscating the assets which belonged to Ben Ali and his extended family).

These connected firms grossly outperform their competitors in terms of employment, output, market share, growth, and indeed profits. How did they do this? The sectors in which these firms are active (such as telecoms, air and maritime transport, commerce and distribution, financial sector, real estate, and hotels and restaurants) are disproportionately subject to restrictions on entry and foreign investment. The performance of firms connected to Ben Ali’s family is significantly larger when they operate in these highly regulated sectors. Put simply, constrained competition allowed more rents to accrue to Ben Ali firms. It didn’t stop there. If regulations did not protect a lucrative sector, Ben Ali would use executive powers to change the legislation in his favor. Specifically, the introduction of new restrictions to foreign investment and authorization requirements is correlated with the presence and entry of firms connected to Ben Ali’s family. Over a 16-year period Ben Ali signed 25 decrees introducing new authorization requirements in 45 different sectors and new FDI restrictions in 28 sectors that served to carve out and protect clan interests from competition—providing yet another opportunity to extract extraordinary profits.

The evidence we find is consistent with a large body of literature showing that countries with more extensive business entry regulations tend to grow more slowly and have higher levels of corruption. Our results demonstrate that, in addition to disrupting firm growth and creating opportunities for bribery, cumbersome entry regulations are also likely to be systematically abused by the state when institutions are weak. The consequences of this use of regulations to extract rents (i.e. to appropriate wealth) is much worse than just the cost of the petty corruption. Consumers pay monopoly prices. Firms have no incentive to improve product quality. And the productivity gains and innovation that would come from new firms is halted. In other words, it undermines the competitiveness of the economy, hampering investment and the creation of jobs.

Three years after the revolution, the economic system that existed under Ben Ali has not been changed significantly—and the demands of Tunisians for access to economic opportunity are far from being realized. While efforts have been made to revise or reform some of these regulations, there is a possibility that Tunisia will have completed its political transition without reforming what was one of the principal facilitators of the corruption and cronyism that sent so many Tunisians to the streets three years ago.

Tunisia has taken a first and very important step: offering wider access to data and information to improve accountability. Now it is time for the second step, removing the regulatory barriers that protected the few at the expense of many.

Comments

A facinating study. With all the entrenched family networks around the world, its lessons are far reaching. Often when such family dynasties collapse the chaos that ensues makes such a study difficult. Records are destroyed and assets grow legs before order resumes. The efforts next door to account for the assets of the Libyan Sovereign Wealth Fund are a case in point. This early study in Tunisia is thus unique and timely. The challenge of course remains how the World Bank can constructively engage in countries while such individuals are in poor and the rent seeking machinery is still in place. How do we engage in resource rich central asian countries where similar structures and abuse are active? This study offers important insights in addressing these challenges, albeit with much work to be done!

Thanks very much for your comments. You are right in pointing out that this is a global problem and that doing this type of political economy analysis is difficult in countries where data is lacking or deliberately being obfuscated; Without the strong support of the Tunisian authorities, this research would simply not have been feasible. The fact that many government agencies, such as the Ministry of Finance and especially the Institut National de la Statistique, are working hard to achieve greater transparency attests to the desire of the Tunisian government to clean house.

In countries where governments are less collaborative and instead completely closed, such political economy analysis is (even) harder, yet all the more important. I believe the Banks's insistence on open data access are very useful in this regard. Where authorities are deliberately shying away from sharing data that can be used to help public policies, we should be especially on guard.

Nicely done Bob, it is good to have clear evidence on cronyism as well as its costs. Clearly legal and regulatory change going forward will be needed but since inquring minds want to know...has the judiciary and other authorities stepped in to deal with these 220 firms? Also, how does one deal with such firms without disrupting whole economies (assuming they are in critical sectors) or within sectors/markets - especially at a time of high unemployment and fragile markets overall? Tunisia is the first country in which we have the evidence, others will follow,presumably calling for some guidance of efficient and equitable ways of dealing with these firms.

Hi Omer,
You raise an important issue; managing an orderly transition towards better functioning markets can be challenging. The Tunisian governments have dedicated a special committee to this effort (see : http://www.finances.gov.tn/index.php?option=com_content&view=article&id=201:gestion-des-biens-confisques&catid=28&Itemid=577&lang=fr), which has been making steady progress even though the process of selling off these firms is still ongoing.

Another important issue is the recovery of wealth. The Stolen Asset Recovery Initiative by the UN and the World Bank (http://star.worldbank.org) has considerable cross-country experience how best to go about this and has proven quite effective in retrieving lost funds.

Thank you for this thorough and clearly-written report which is accessible even to those of us who are not economy experts. I do have one question regarding a statement in the introductory section:

"The World Economic Forum repeatedly ranked Tunisia as the most competitive economy in Africa and the IMF as well as the World Bank heralded Tunisia as a role model for other developing
countries."

One can imagine that during the time of Ben Ali's tenure, the Ministry of Finance might not have been as open as it is now to sharing the data that has proved so striking and revelatory and informative for this report. On the other hand, the World Bank has had projects in Tunisia for a long time (since the early 1990's, I think?), and it seems curious that this report (which recognizes that Tunisia's economic «policy infrastructure inherited from the Ben Ali era perpetuates social exclusion and invites corruption») should be produced three years after the revolution, especially in light of the fact that the World Bank formally commended Tunisia as a role model for other countries.

Why, when the World Bank has been invested in Tunisia for so long, do these revelations about economic corruption emerge now?

Vanessa - thanks for your comments. I would push back slightly that these revelations have only emerged now. It's been actually quite interesting following the debate in Tunisia over this report the last few days, because a lot of the reactions have been "we knew this all along." In fact, arguably, the revolution was one of the outpourings of popular discontent against the system that the Ben Ali clan created, because even if Tunisians weren't allowed to talk about it, everyone knew what was going on behind the scenes. In that sense, our report confirms and quantifies what was known, but not proven about the old system. But you are exactly right that, for a variety of reasons, these issues weren't emphasized or weren't acknowledged - at least as strongly as they should have been. At the World Bank, we clearly were not immune to getting behind the image the Ben Ali regime tried to create for itself. And while we regularly detailed the regulatory failures, the barriers to entry, and the privileges of the old system, this was often masked in bureaucratic language that did not get to the heart of what was clearly a system asphyxiated by its own corruption. It's certainly a lesson we'll take forward and it's one of the key reasons we've put access to information, transparency, and accountability on the top of our agenda with Tunisia (and across the region) since the revolution.

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